Finance and the Economy · Seminar 5 · Market structures

Supernormal profit and what happens to it

A firm produces where MR = MC and earns (P − ATC) × Q, the shaded rectangle. Under perfect competition the demand curve is horizontal; under monopolistic competition and monopoly it slopes down. Watch what free entry does to the rectangle, and why barriers to entry let a monopolist keep it. Questions 3 and 4.

Pick a market structure. The slider moves the price (perfect competition) or the demand curve (monopolistic competition and monopoly); the long-run buttons jump to where profit is exactly zero.

Market price (perfect competition)

lowhigh

Demand curve position (entry shifts it left)

after entrybefore entry

Output (MR = MC)

Price

ATC at that output

Profit

What the structures share and where they differ. All three firms choose output where MR = MC. Free entry (perfect and monopolistic competition) drives profit to zero in the long run; barriers (monopoly) do not. A horizontal demand curve means P = MC and no scope to price above cost; a downward-sloping one means P > MC, excess capacity and a reason to advertise.

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